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As Americans, we’re used to thinking that we will inevitably do better than our parents’ generation. But,
for now at least, this type of progress may be facing some roadblocks — and this inability to gain ground,
financially, can have real implications for today’s younger people and their approach to investing.
Before we get to the investment component, though, let’s quickly review the nature of the problem. In
a nutshell, younger Americans — those in their twenties and thirties — have accrued significantly less
wealth than their parents did at the same age, according to a recent study by the Urban Institute. Here’s
why:
• Bursting of housing “bubble” — Many younger people who bought houses shortly before the housing
“bubble” began deflating in 2006 now find themselves to be “underwater” on their mortgages — that
is, they owe more than their houses are worth. Consequently, they have less opportunity to build home
equity — which has been an important means of building wealth for past generations.
• Student-loan debt — The median balance among all households with student loan debt is now more
than $13,000, according to the Pew Research Center — and debt levels are much higher for recent
graduates. It can take years to pay off these debts — and the money being used for debt payments is
money that can’t go toward building wealth for long-term goals.
• Wage stagnation — For several years, the job market has been pretty bad for younger workers. And
even those with jobs aren’t making much headway, because wages, adjusted for inflation, have largely
stagnated for over a decade. Less income clearly equates to less opportunities for investing and creating
wealth.
Still, even given these somewhat grim realities, younger people can help themselves build resources for
the future and make progress toward their long-term goals. If you’re in this group, what can you do?
For starters, pay yourself first. Set up an automatic payment each month from your checking or savings
account into an investment vehicle, such as an IRA. At first, you may only be able to afford small sums —
but, over time, you may be pleasantly surprised at the amount you’ve saved.
Next, every time your salary goes up, try to increase the amount you put into your 401(k) or other
employer-sponsored retirement plan. Because you typically contribute pretax dollars to your 401(k) or
other plan, the more you put in, the lower your taxable income. Plus, your money can grow on a tax-
deferred basis.
Here’s another suggestion: Don’t be “over-cautious” with your investments. Many younger investors,
apparently nervous due to market volatility of recent years, have become quite conservative, putting
relatively large amounts of their portfolio into vehicles that offer significant protection of principal but
little in the way of growth potential. Of course, the financial markets will always fluctuate, and downturns
will occur — but when you’re young, and you have many decades in which to invest, you have time to
overcome short-term declines. To achieve your long-term goals, such as a comfortable retirement, you
will unquestionably need some growth elements in your portfolio, with the exact amount based on your
risk tolerance and specific objectives.
These aren’t the easiest times for young people. Nonetheless, with diligence, perseverance and ameasure
of sacrifice, you can gain some control over your financial fortunes — so look for your opportunities.
How Can Younger Investors Cope with Tough Times?
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o achieve investment success, you don’t have to start out with a huge sum or “get lucky” by
picking “hot” stocks. In fact, very few people actually travel those two routes. But in working
toward your investment goals, you need to be persistent — and one of the best ways to
demonstrate that persistence is to invest automatically.
How do you become an “automatic” investor? You simply need to have your bank automatically
move money each month from a checking or savings account into the investments of your
choice. When you’re first starting out in the working world, you may not be able to afford much,
but any amount — even if it’s just $50 or $100 a month — will be valuable. Then, as your career
progresses and your income rises, you can gradually increase your monthly contributions.
By becoming an autom tic investor, you can gain some key benefits, including these:
• Discipline — Many people think about investing but decide to wait until they have “a little
extra cash.” Before they realize it, they’ve used the money for other purposes. When you invest
automatically, you’re essentially taking a spending decision “out of your hands.” And as you see
your accounts grow over time, your investm nt discipline will be self-r i forcing.
• Long-term focus — There’s never any shortage of events — political crises, economic
downturns, natural disasters — that cause investors to take a “timeout” from investing. Yet if
you head to the investment sidelines, even for a short while, you might miss out on some good
opportunities. By investing automatically each month, you’ll maintain a long-term focus.
• Potential for reduced investment costs — If you invest the same amount of money each
month into the same investments, you’ll automatically be a “smart shopper.” When prices drop,
your monthly investment ill buy ore shares, a d wh n rices ris , you’ll buy f wer shares
— j st as you’d probably buy less of anything when prices are high. Over time, this type of
systematic investment typically results in lower costs per share. Furthermore, when you invest
systematic lly, you’re les lik ly to constantly buy nd sell investments in an effort to boost
your re urns. This yp of frequ nt trading is often ineffective — and it can raise your overal
investment costs with potential fees, commissions and taxes. (Ke p in mind, though, that
systematic investing does not guarantee a profit or protect against loss. Also, you’ll need the
financial resources available to keep investing through up and down markets.)
Clearly, automatic investing offers some major advantages to you as you seek to build wealth.
Of course, if you’re contributing to a 401(k) or other employer-sponsored retirement plan,
you’re already automatically investing because money is taken out of your paycheck at regular
intervals to go toward the investments you’ve chosen in your plan. But by employing automatic
investing techniques to other vehicles, such as an Individual Retirement Account (IRA), you can
continue your progress toward your long-term goals, including retirement.
So, do what it takes to become an automatic investor. It’s easy, it’s smart — and it can help you
work toward the type of future you’ve envisioned.
Automatic Investing Can Pay Off for You